Morningstar Equities

Morningstar Equities

Harvey Norman Holdings Ltd HVN| Harvey Norman Continues to Struggle as Customers Go Elsewhere
Morningstar Recommendation: Sell
Tim Montague-Jones, Morningstar Analyst - 02 9276 4469
After adjusting for net property revaluations Harvey Norman reports a 3.3% decline in net profit after tax of AUD 183 million on a revenue decline of 6% to AUD 1.3 billion. Complexity of the result makes it increasingly difficult to discern comparable returns. The result is above our forecast of AUD 171 million but does include some surprises, with a AUD 7.7 million increase to AUD 11 million from a joint venture renting mining camp accommodation. The company is unwilling to provide any clear guidance on the sustainability of this new earnings contribution. We make no material change to our fair value estimate of AUD 1.70 and retain our fiscal 2014 forecast for earnings of AUD 220 million. Fair value uncertainty remains high as the company continues to lower its operating costs to offset what we expect is the long-term structural weakness in revenues as consumers increasingly turn to cheaper online competitors to purchase what are commoditised lifestyle products and the reason we consider this company not to have an economic moat.

Fisher & Paykel Healthcare Corporation Limited FPH| Fisher & Paykel Healthcare Lifts Guidance Again as New Products Continue to Gain Traction
Morningstar Recommendation: Hold
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Fisher & Paykel Healthcare raised its net profit after tax, or NPAT, guidance from NZD 90 million to NZD 90 to NZD 95 million for fiscal 2014, assuming a New Zealand /USD exchange rate of 0.80, mainly due to favourable trading in the first half to date. The revised guidance assumes constant currency revenue growth of 15% for fiscal 2014 against previous guidance of 14%.

Virgin Australia Holdings Limited VAH| Virgin Australia Reports a Large Loss in Year of Transformation
Morningstar Recommendation: Hold
Nathan Zaia, Morningstar Analyst - 02 9276 4491
Virgin Australia reported another dismal result, with a fiscal 2013 reported loss of AUD 98 million, consistent with guidance issued earlier this month. On an underlying basis, a loss before tax of AUD 73 million was worse than our expectations.? Virgin cited a number of factors impacting the result, including the difficult economic and competitive environment, restructuring costs and carbon tax. We see little relief for Virgin and expect tight economic conditions and intense competition to continue. Qantas remains steadfast in protecting its market share position. Even though excess capacity is hurting returns for all players, Qantas's balance sheet and cash generative loyalty program puts it in a stronger position to endure a battle for market share.? Our no-moat and very-high uncertainty ratings remain unchanged. We have made minor adjustments to our medium-term forecasts but there is no change to our AUD 0.35 fair value estimate. The shares are trading moderately above fair value, but we consider an investment in the company to be very high risk.

Graincorp Limited GNC| ADM Extends Takeover Offer for GrainCorp as It Awaits Final Regulatory Approvals
Morningstar Recommendation: Reduce
Peter Rae, Morningstar Analyst - 0414300107
U.S. agribusiness Archer Daniels Midland, or ADM, has extended its takeover offer for GrainCorp pending the receipt of outstanding regulatory approvals. The offer will now close on 16 November 2013 unless further extended. The Australian Foreign Investment Review Board, or FIRB, is the main regulatory approval outstanding. Despite anti-foreign investment rhetoric from both sides of politics ahead of the federal election, we think it still likely the takeover will be approved. However, the risk of FIRB rejection cannot be totally ruled out, so there is no certainty the takeover will proceed.

Vector Limited VCT-NZ| Vector's Results In Line but Earnings to Decline Materially in 2014
Morningstar Recommendation: Hold
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Vector's full-year results were in line with our estimates. Underlying net profit after tax, or NPAT, rose 2.1%. Earnings before interest, tax, depreciation & amortisation, or EBITDA, was slightly ahead of last year and above the guidance, despite a warmer summer and a milder winter which affected sales volumes of the electricity business. Overall, the results were driven by the firm's technology business and good cost control. Dividends rose 3.4% to NZD 0.15 per share for fiscal 2013, slightly ahead of profit growth. Vector intends to maintain dividends even in the face of declining earnings. At the current share price, the dividend yield equates to 5.8%, which is fully imputed for New Zealand shareholders.

Metcash - Downgrade due to price change
Fisher & Paykel Hlth - Downgrade due to price change
Amalgamated Holdings - Upgrade due to price change
Amcom Telecommunications - Downgrade due to price change
Fisher & Paykel Healthcare - Downgrade due to price change

Briscoe Group - Downgrade due to price change
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